Judge rules Illinois use tax law unconstitutional

Scott Kluth, CEO of CouponCabin, expressed relief that a Circuit Court judge struck down the Illinois use tax law.

The Illinois use tax law that spurred CouponCabin and FatWallet to leave the state last year was ruled unconstitutional Wednesday by a Cook County Circuit Court judge who said it violates the Interstate Commerce Clause and Internet Tax Freedom Act, according to the Performance Marketing Association, which had filed a lawsuit challenging the use tax’s constitutionality.

Cook County Circuit Court Judge Robert Lopez Cepero agreed with the association’s position that receiving referral business from Illinois-based affiliate marketers does not constitute nexus — or a physical presence in the state — for online retailers. “We are thrilled with the outcome of today’s preceding and believe it paves the way for Internet marketing affiliates to get back in business in Illinois,” Rebecca Madigan, executive director of the Performance Marketing Association, said in a blogpost. “We commend Judge Cepero for his timely and thoughtful decision.”

The Amazon impact

Under the act that Gov. Pat Quinn signed into law in March 2011, out-of-state online merchants were required to collect and remit Illinois sales tax of 6.25 percent when they did business with Illinois affiliate marketers. The so-called Main Street Fairness Act was designed to level the playing field for brick-and-mortar retailers, but critics said it would chase business and jobs out of state. Due to the law, Amazon, Overstock and other online retailers said they would stop doing business with Illinois affiliates, spurring CouponCabin to move to Whiting, Ind., and FatWallet to relocate to Beloit, Wis.

In a statement Wednesday, Scott Kluth, founder and chief executive officer at CouponCabin, said: “CouponCabin is thrilled to hear the news about the affiliate tax being declared invalid in Illinois. We are relieved that the 9,000 affiliates that were based in Illinois may now have the opportunity to operate in Illinois without jeopardizing their business relationships with online retailers. This ruling places the responsibility for a solution back where it belongs: in Congress. CouponCabin continues to strongly support a federal solution to the taxation of all online transactions.”

At the heart of the controversy is what constitutes having a sufficient presence in a state for online merchants to be required to collect and remit state sales tax.

Quill vs. North Dakota case

“The interstate application of sales tax has always been a federal issue,” Brad Wilson, editor in chief of Brad’s Deals, told SmallBizChicago.com when the law passed last year. He noted the 1992 U.S. Supreme Court Case of Illinois-based office supply cataloger Quill Corp. vs. North Dakota.

In that case, the high court decided that out-of-state merchants could be required to collect and remit sales tax for other states if they had brick-and-mortar locations in the state, such as offices, warehouses or employees, but not customers alone. But the ruling said states could not supersede the Interstate Commerce Clause by requiring out-of-state marketers with no physical presence to collect and remit sales tax.

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